Is There a Relationship between Foreign Direct Investment, Human Capital, Trade Openness and Economic Growth of Pakistani Economy?

Abstract

Despite profuse literature on foreign direct investment, human capital and trade openness linkage with economic growth of developed economies, little profound literature is available in case of Pakistan. This paper specifically examines relationship of economic growth with foreign direct investment, human capital and trade openness for Pakistan over the time span 1980-2013. Applications of Johansen Co-integration test indicate the existence of long run relationship between the variables. In addition, VECM also confirms the long run relationship between variables. Also, diagnostic tests show normality and no auto correlation in the model. The CUSUMsq test signifies the specification of the model. The policy makers in Pakistan should employ policies to encourage FDI projects promoting domestic exports. Moreover, an increase in educational, health can result in efficient domestic human capital. The focus must also be on producing finished products in order to promote exports of Pakistan. Steps towards R&D activities should be encouraged to stimulate indigenous technological capability of Pakistan. This would upsurge the local production capability, capacity, promote exports, and improve terms of trade of Pakistan.